Wells Fargo & Co.
(
WFC
) is seeking to reverse a judgment that directed it to pay $203
million in damages to customers in California over some of its
debit card practices that were maneuvered to push up its overdraft
fees, according to a Bloomberg report.
Wells Fargo contends that it cannot be sued under the California
law for any of its practices related to debit-card transactions. In
fact, its practices come under the purview of federal laws, which
permit its own procedures for calculating such fees.
The Allegations
It was way back in 2007 when customers lodged a complaint for
charging improper overdraft fees by Wells Fargo. The company was
alleged to have manipulated transaction entries to generate greater
overdraft fees. Transactions were re-sequenced by the bank so that
the largest withdrawals were deducted first instead of being
cleared in the order in which they were received.
As a result, customers' balances dwindled faster, resulting in a
larger number of 'overdrawn' transactions, each of which then
became chargeable. Moreover, as a result of such practices, funds
were overdrawn several times a day in small amounts.
In 2010, three customers of Wells Fargo, who sued the company on
behalf of several customers in California, achieved victory.
Consequently, the U.S. District Judge consented to the allegations
of the customers and concluded that the practice was a fraudulent
one. The company was ordered to pay $203 million to such account
holders who were thrashed with multiple overdraft fees.
The Cat Fight
The lawyer for the plaintiffs argued that the practice was
improper and was intended to boost the company's overdraft fees.
Moreover, the lawyer also argued that there exist limits to its
authority, which has been recognized by the Office of the
Comptroller of Currency and the federal agency, and such limits
come under the purview of California law.
However, the lawyer for Wells Fargo argued that customers were
aware of such practices and such clauses were their in the account
agreement that was permitted by the Regulators including the
Federal Reserve.
Yet again, another lawyer on behalf of the customers argued they
were deluded about the policy by Wells Fargo. He said that the
advertisement of automatic deduction of debit transactions from the
account of a customer made them understand that the posting of
withdrawals would be made in a chronological order.
Moreover, he argued that the claim made by Wells Fargo that it
cannot be taken to trial based on the unfair business practices law
of California was dubious as only allegations that get in the way
of operations of the bank are pre-empted by federal regulation of
banks.
Our Take
We believe that fraudulent practices of any bank need to be
judged well and if found that the customers were cheated of their
hard earned money, then they need to be compensated.
Now, if Wells Fargo can make its way through its claims and
reverse the order, then that will limit draining out of the
company's money as a penalty. However, several banks have been sued
on similar grounds. Notably,
Bank of America Corp.
(
BAC
) and
JPMorgan Chase & Co.
(
JPM
) have consented to paying millions to settle such claims in the
past one year. So what happens to Wells Fargo over this litigation
will be closely followed.
Wells Fargo retains a Zacks #3 Rank, which translates into a
short-term Hold recommendation. Considering its fundamental, we
also have a Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis
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WELLS FARGO-NEW (WFC): Free Stock Analysis
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